What Do I Need To Include In A Business Partnership Contract?
Starting your business has its own challenges, but what about starting a business with a partner? Although both have similarities, a business partnership contract can set you up for success by outlining the rights and responsibilities of partners from the very beginning. Here's what you should know about setting up a business partnership contract in Arizona.
Note: This article isn’t intended as legal advice, and rules regarding this may change depending on your situation. To address your business’s unique needs, talk with a business and civil law attorney. ARTEMiS Law has decades of experience in Arizona business law and provides full-service and unbundled legal services (for those who need consultations as needed) to cater to everyone. You can contact us here to schedule a call.
Why are small business partnership agreements important?
A partnership is a business created by two or more people. Because more than one person is responsible for the company, it is neither appropriate nor legally safe to simply seal the partnership with a handshake.A small business partnership agreement is important because it:
- Clearly outlines each partner’s responsibility
- Answers “what if” questions like “What if someone wants to leave the business?” and “What if another company wants to acquire ours?”
- Protects each partner’s financial and sweat-equity investment
- Sets up a pathway to settle disagreements
- Outlines how decisions will be made
Even a simple partnership agreement can offer basic benefits to each partner that allows them to enter into their business with confidence.
What should be included in a business partnership agreement?
There are eight essential elements of business partnership agreements. Each business partnership may require some or all of these.It is always best to work with an attorney as you develop your business partnership agreement, as they'll be best able to advise you on each of these elements.
Element #1: Who contributes what?
In the beginning, answering the question of who contributes to the business in terms of time, financial resources, and expertise is crucial. You do not want to start your partnership with arguments about who has contributed the most.A qualified attorney with expertise in drafting contracts for your particular industry can help you clearly outline each partner’s commitment to the business.
Element #2: How are profits managed and distributed?
Just as you want to know who puts what into the business, you also want to know who gets what out of it.After all, you want your business to be profitable and provide a return. Ask yourself questions like:
- Will partners each receive a set salary, or will they receive a percentage of the profits?
- Will the salary change based on the age of the company or the amount of profit, or will it stay the same?
- How do we cover expenses?
Outlining how each partner will be compensated provides a measure of security from the very beginning.
Element #3: How are issues of ownership handled?
While some businesses start and end with the same number of owners, for many businesses, there will come a time when more partners join the company or others leave. How will your business handle recruiting and bringing in new ownership? And what happens if an owner wants to leave and start their own business?Your business partnership agreement can figure out these matters ahead of time. For example, a non-compete clause prevents a new business from poaching customers.Issues regarding retirement and sudden death or chronic illness can also be addressed in your business partnership agreement. Deciding what happens if a partner can no longer participate in the business is a crucial part of the contract.
Element #4: How are decisions made?
Even a simple business partnership contract can outline things like day-to-day management of operations and long-term planning. Both of these require detailing how those decisions should be made.For instance, will partners vote on major issues that arise, or will decision-making be divided according to each partner’s regular duties? Are there some decisions that require unanimous agreement?The more detailed you are at the start of your business, the easier even the most complex decisions will be in the future.
Element #5: How will disputes be resolved?
No matter how in accord you are in the beginning, you and your partners may not always agree on decisions regarding your business.If disputes arise, how will they be resolved? A clause for mediation or an arbitration clause in your business partnership agreement can prevent costly and drawn-out lawsuits.
Element #6: What happens in case of emergency?
Starting out, no one wants to imagine a catastrophe that threatens their business. But what happens if one partner faces a life-threatening illness? What if one partner wants to retire? How will you handle a buyout? If a natural disaster destroys your inventory, how will you recover?There are many unforeseen emergencies that can occur. Sitting down to outline a basic plan for how you will navigate these challenges before they happen can be the difference between a business that lasts for two years and one that spans generations.
Element #7: What happens if the business is dissolved?
Businesses dissolve for many reasons. Sometimes partners disagree on the vision for the business; sometimes one wishes to expand into another area.No matter the reason, what happens if your business is dissolved? How will partners share the legal expense of dissolution as well as the division of assets and profits that remain?
Element #8: What if a partner breaches this contract?
Outlining what happens if a breach of contract occurs is also an important part of this document. A business partnership contract is a legally binding document, with practical and legal consequences for its breach. How will you handle this, should it arise?
How to create a business partnership agreement
It is possible to draft a simple business partnership agreement on your own. Looking at examples of business partnership contracts is a good place to start. You can use a template or a simple list of the above elements to get you started.However, for many people, consulting with a lawyer at the beginning will be vital. While these elements seem like simple things that can be figured out over a long lunch, you want your business partnership contract to be ironclad. Working with an attorney or even an experienced legal document preparer, if cost is a concern, can help.An attorney experienced with business law likely will already have contract examples and boilerplate language that works in your state for your industry. They can also clarify what options you have, advise you on common choices new businesses typically make in their agreements, and answer any specific questions you have.Working with an attorney from the start is a small price to pay for a well-crafted and precise business partnership agreement.We are a firm of award-winning Scottsdale attorneys who can help you with your business partnership contract.
ARTEMiS Law Firm attorneys are skilled in all areas of business law, with advanced experience in healthcare and other highly-regulated fields. Get in touch today for more help with your business contracts.
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